The US Surveillance Dragnet Extends to Foreign Bank Data, Too

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October 3, 2013 // 11:20 AM EST

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Zurich is home to many of Switzerland's largest banks, which are bristling at US requests for banking data. Via Storm Crypt/Flickr

In 2010, the US government passed Foreign Account Tax Compliance Act (FATCA), a law designed to nail American tax cheats hiding their money abroad. It tapped into the recession blame game zeitgeist, and preceded the anti-tax dodging narratives that would later emerge from the Occupy Wall Street movement.

By 2014, FATCA will be fully implemented. But like many US laws, it's flawed, and those flaws aren't simply bureaucratic or procedural. FATCA's issues run parallel to the surveillance state publicly revealed in Edward Snowden's NSA leaks. The law aims to catch individual tax dodgers by forcing Foreign Financial Institutions (FFIs) to hand over client data in dragnet fashion. No surveillance backdoors are required here. The US makes Intergovernmental Agreements (IGAs) with foreign countries, allowing the IRS to demand client data from FFIs. If it isn't delivered, then economic sanctions are levied.

“It's the same mentality as the NSA program,” said James George Jatras, a former US diplomat and Senate staffer. “If you're supposedly chasing terrorists, tracking down individuals is too much trouble; just sweep everybody's information and you'll find terrorists somewhere in there. That's the theory behind FATCA—it's much easier to sweep up everybody's financial information and find the bad guys somewhere in there.”

Jatras states that this extra-territorial demand made by one country on almost all major countries is unprecedented. And, what is more, he notes that the privacy community hasn't paid much attention to FATCA. “They understand that terrorism is not sufficient enough for mass surveillance,” said Jatras. “But they don't have the same understanding when it comes to FATCA's blanket data demands.”

A letter written by Senator Carl Levin (D-MI) to the IRS originally tipped Jatras off to the FATCA privacy concern. Referencing United States Code Chapter 26, Section 6103, Levin argues that foreign bank information of US citizens should be legal to collect:

FFIs are not, after all, U.S. taxpayers, and will not be supplying tax information on behalf of their U.S. clients; they will instead be providing information about accounts opened by U.S. persons. The U.S. Supreme Court has long held that bank account information is not inherently confidential but is subject to inspection by law enforcement and others in appropriate circumstances. Foreign account information is too important to a wide range of civil and criminal law enforcement and national security efforts to be designated as tax return information bound by Section 6103’s severe restrictions on access.

“6103 is narrowly limited to the taxpayer and his tax preparers (lawyers, accounts, and so forth), and there is a section that guarantees confidentiality, limiting your tax returns to the IRS,” said Jatras. “Senator Levin is simply pointing out what is obvious under the law, which is that FFIs have no expectation of confidentiality, and indeed the Americans whose accounts they would be disclosing don't either, because the FFIs are not their tax preparers.”

"Suppose that China or France forced American companies to comply to a similar law that would be very expensive, and punished non-compliance with economic sanctions—would that make it legal?”

What this means is that US agencies, including intelligence bureaus like the NSA, wouldn't have to seek this information out themselves—under FATCA, the IRS can just give it to them. And like the NSA's various international surveillance programs, there is an absurd illogic to FATCA. This past summer, the NSA attempted to calm Americans' paranoia by saying, “Oh, we're only spying on foreigners," as if to say that mass foreign surveillance was, on principle, okay if US citizens weren't the targets. FATCA has a similar, if mirrored, argument at its core, with the US telling the banking world to live by its rules because it says it's only gleaning data on US taxpayers.

“I don't see any theory of legal jurisdiction here at all,” remarked Jatras. “Suppose that China or France forced American companies to comply to a similar law that would be very expensive, and punished non-compliance with economic sanctions—would that make it legal?” Indeed, there would be a collective "piss off" from US politicians if the tables were turned.

Tackling the US's tax haven problem, which FATCA was nominally designed to do, is certainly an admirable goal. A US PIRG study earlier this year pegged lost tax revenue from offshore banking at around $150 billion a year. But much of that is from corporations who use elaborate schemes to avoid paying taxes in the US. But not only is FATCA aimed largely at gathering individuals' banking data, it's also designed to scrape data en masse in order to search for patterns and abnormalities. A recent Forbes story highlights how difficult cracking down on tax havens actually is, and FATCA isn't well equipped for the job.

“One of the things that Necessary & Proportionate lay down under proportionality is that there should be a high degree of probability that a serious crime has been committed," said Jatras. "Evidence of such a crime would be obtained by accessing the protected information only after other available, less invasive investigative techniques had been exhausted. As it stands, FATCA is blatantly in violation of proportionality and other of those principles.”

Canada's New Democratic Party's Official Opposition Critic for National Revenue, Murray Rankin, has a strong opinion on FATCA's proportionality, too. On September 25th, Rankin wrote a letter to Canadian Minister of Finance James Flaherty, in which he expressed his reservations with the law.

New Democrats are concerned with the prospect of a foreign nation unilaterally imposing obligations on Canadian banks to disclose personal information. The Canadian Government has a responsibility to protect Canada’s tax base, and while we understand the United States’ desire to protect their own tax base, this should not come at the cost of the rights of individuals residing in our own country. Cracking down on tax cheats should occur through international cooperation rather than unilateral action. What’s more, the secrecy of the negotiations over this agreement has left Canadians in the dark as to the integrity of their personal banking information. The Canadian government should be standing up for the civil liberties of Canadians.

This is all well and good, but is anything being done stateside to raise awareness or alter FATCA? As it turns out, Senators Ron Wyden (D-OR), Mark Udall (D-CO), Richard Blumenthal (D-CN), and Rand Paul (R-KY) recently submitted an NSA reform bill. But the same principles could well apply to FATCA, for which Senator Paul has introduced a repeal bill. Neither is likely to go anywhere until people become more aware of the laws and their implications.

When asked why government agencies outside of the IRS might want this information, Jatras responded, “Once you have this kind of panopticon surveillance state mentality, I think it becomes a self-justifying principle.” The goal might well be to create a financial and social accounting matrix; a tool for mapping relationships by way of money. Or, in other words, a way of organizing data about people by way of financial surveillance.

“Some of the government agencies that have this surveillance and control mentality believe that financial information is far more valuable than other data,” Jatras added. "It seems to me that financial information is a much more potent quantity in understanding and, at some point, possibly even controlling people's lives than what a person's Instagram pictures look like.”

In other words, it hits people close to home, threatening their ability to survive and function within society. You know, pay rent, buy food, and so forth. As Motherboard's Derek Mead recently noted, "Financial data is an extremely valuable of tracking relationships and movements that otherwise can't be identified, and it really shouldn't be much of a surprise that the NSA—already focused on developing intelligence in every other sphere—would also be tracking transactions. But the scope is incredible.”

Jatras speculates that forcing FFIs to download their data onto a US-run website could potentially expose them to further electronic security risks. In other words, even more of their data could be surveilled by the NSA, FBI, and so on.

“If you have the resources of US intelligence agencies, then why wouldn't you use that as an opportunity to see what else the FFIs are up to?" said Jatras. "It's speculative, but I don't think it can be ruled out.”